What is the chance employers will drop health benefits in 2014?

McKinsey & Co is under attack because it released a survey indicating a significant number of employers will drop health benefit coverage for employees when the Affordable Care Act exchanges are available in 2014. The study’s conclusions are not consistent with administration or CBO projections (especially related cost projections).

Will employers make such a move, is it beyond their power or will? Well, doubters should look at what employers have done in the past in the name of saving money and preserving earnings.

Is this what TR meant by a square deal?

Retiree health benefits have been capped or eliminated, retiree spousal coverage has been dropped, employees have been shifted into high deductible plans, pension plans frozen, 401k matches stopped and much more. In other words, when it comes to meeting shareholders expectations, commitments to employees are an easy target and a low priority.

Consider the 100-year-old company with a pension plan in effect since 1911. Even during the great depression it maintained its pension plan trimming pay and pensions by 10% and reinstating both cuts after three years. The twenty-first century is a different world. Employees of this company who still have the pension benefit are told their promised benefit will be frozen and future benefits will accrue under a new less generous formula. So, a 55-year-old trying to plan a future retirement suddenly finds the pension to be several thousand dollars a year less than expected.

According to the Employee Benefits Research Institute: EMPLOYMENT-BASED COVERAGE REMAINS DOMINANT SOURCE OF HEALTH COVERAGE, BUT CONTINUES TO ERODE: Employment-based health benefits remain the most common form of health coverage in the United States. In 2009, 59 percent of the nonelderly population had employment-based health benefits, down from 68.4 percent in 2000.

Legally of course there is no obligation for an employer to continue these benefits. However, employers conveniently forget that future benefits are part of total compensation over an employees career. Employees paid for these benefit promises through lower cash wages, a point employers have no trouble pointing out when promoting the value of the compensation package.

How is cutting the pension a worker ten years from retirement is counting on any different from telling an executive the stock options he received nine years ago as part of his total compensation now must be forfeited? Answer, one happens and one doesn’t.

Employers have a right and obligation to manage costs and to assure that promises made can be kept. Sometimes that means changing those obligations for new hires to begin a lower cost structure, it always means keeping a reasonable level of total compensation costs, but it should not mean changing the deal for long-term employees who have little time to adjust and had every reason to believe they could rely on that portion of their total compensation that was earned over ten, twenty or thirty years.

So, do you still think employers faced with ever escalating health insurance costs will pass up the opportunity to save thousands of dollars per employee by putting them in exchanges?

Let me also blow up the myth held by many economists and other experts that employers will feel any obligation to make up lost benefits with higher wages. Those savings have and will continue to go to the bottom line.

[Note: someone is going to say, ok, how is this any different from what the states are attempting to do to their workers, you support those changes. Yes, I do because those benefits have been mismanaged and abused for decades, they are consistently well above the competitive market and unlike private employers, including in the example above, states have not attempted to manage their costs over the years and rather took little or no action until a crisis was born.]

Back in approx. 1995 John Morrell Company decided that Retirees would not get any more Health Benefits from the Company. The Union excuse for their passimg this by was that they overlooked it. When does the Union overlook anything. Health benefits were supposed to be part of the package for lower Retirement benefits. Plus when you give up money each month to pay for spouse to receive your pension, if she passes away first they do not increase your benefits.

First and foremost, can you tell me the results of the 2012, 2014 and 2016 elections? These elections will have significant sway on what happens. Exchanges will not be available until 2014. Large employers will not be eligible to have their employees enter exchanges until 2017. Much will transpire between now and then.

Second, the loss of the pre-tax cost for health benefits under section 125, etc. will mean that employees will need more than double the amount of their outlay to pay for their health benefits since these amounts will not only rise between now and then, but so too will their need for pre-tax dollars to pay for this then to be post tax cost.

Will companies pay the difference, likely not, but in the case of lower paid workers it will benefit them to go to the exchange to get coverage…BUT we have yet to see what the cost of coverage will actually be when purchased from an exchange. However, do we really think that the current penalty amount can stand the test of time and remain at this unusually low amount?

Ah, this is what you are referring to, but this is different from merely dropping coverage and paying the fine.

“Exchange plans offered through cafeteria plans. Before 2017, only small employers (up to 100 employees) may participate in the Health Exchange. Before 2016, a state may cap participation to employers with 50 or fewer employees. These employers can use their cafeteria plan to allow participants to pay for Exchange-related coverage that is offered by the employer.”